PAEs and SEPs: When is patent enforcement anti-competitive?

10 minute read
08 April 2016

As we reported previously, the Canadian Competition Bureau ("Bureau") held a consultation process in 2015 where interested parties were invited to make submissions on draft Intellectual Property Enforcement Guidelines ("IPEGs"). The draft IPEGs addressed how the Bureau may approach, among other things, the conduct of patent assertion entities (PAEs) and conduct concerning standard essential patents (SEPs).

As a result of the consultation process, the Bureau has updated and finalized the IPEGs, which clarify some of the views outlined in the draft IPEGs. The Bureau has indicated that it will review the IPEGs annually and will revise them as needed in light of experience, changing circumstances and decisions of the Competition Tribunal and the courts.

This article addresses the Bureau's views with respect to the conduct of PAEs and conduct concerning SEPs. In a separate article, we address the Bureau's views with respect to patent settlements and product switching.

Patent Assertion Entities

Historically, PAEs have predominantly enforced their patents in the United States, particularly in locations such as the Eastern District of Texas. However, PAEs have increasingly been facing headwinds in the United States largely as a result of (i) court decisions that make enforcement more difficult and (ii) new post-grant processes for challenging patent validity. Regarding the former (i), decisions such as eBay, which has made permanent injunctions virtually impossible for PAEs to obtain, and Alice, which has resulted in the invalidation of many business method-related patents, have caused many PAEs to re-assess the strength and value of their portfolios, and in some situations alter litigation strategies or not pursue enforcement at all. Regarding the latter (ii), the introduction of the inter partes review (IPR) procedure has made it easier and cheaper for accused infringers to invalidate US patents.

In view of the above, PAEs are increasingly setting their sights on other countries, including Canada. In Canada, there is no eBay-equivalent. A default remedy in a patent infringement action remains the granting of a permanent injunction; "only in very rare circumstances" will a permanent injunction be denied according to Canadian case law. There is also no Alice-equivalent in Canada, and post-grant validity challenges before the Canadian Patent Office statistically favour patentees by a substantial margin. Other aspects of the Canadian system favour patentees, such as the lack of any requirement for actual or constructive notice of patent infringement for damages to accrue.

Notwithstanding the aspects of the Canadian system favouring patentees and the increasing amount of PAE activity in Canada, there are competition law implications related to enforcement in Canada that PAEs and accused infringers alike ought to be aware of.

The draft IPEGs released in June 2015 stated that the indiscriminate or indifferent sending of patent infringement demand letters could attract scrutiny under the misleading advertising provisions of the Competition Act (the "Act"). For example, the draft IPEGs indicated that where a PAE "was sending letters to businesses indiscriminately, or was indifferent to whether the representations were misleading, then the misrepresentations were made knowingly or recklessly and would raise concerns under both the reviewable matters and criminal provisions the Act."

The updated IPEGs released on March 31, 2016 clarify the Bureau's position with respect to PAEs and the sending of demand letters. In particular, the updated IPEGs no longer refer to "indiscriminate" sending of letters or "indifference" on the part of a PAE with respect to the allegations of infringement. Rather, the Bureau states that its "focus" is "on whether the notices included representations that were false or misleading in a material respect", including the "general impression created by the notice, as well as its literal meaning". For example, if a demand letter states that others have already paid the PAE licensing fees, and that the PAE would sue the accused infringer if the demanded licensing fee was not paid immediately, but one or both of these claims were found to not be true (e.g., no prior fees have been paid, or the PAE has no intention of commencing suit), then the Bureau would be concerned that the letter contains false or misleading representations. The representations would be "material" if they "would affect the likelihood of the recipients taking some significant action in response to the claims, up to and including acceding to the demand".

The Act provides a wide range of remedies and sanctions in connection with misleading representations. The most egregious cases where the representations are clearly fraudulent and target a vulnerable category of customers can attract criminal sanctions pursuant to section 52 of the Act which includes fines and even imprisonment. In less serious cases, the Commissioner of Competition can, pursuant to section 74, initiate civil proceedings and seek an administrative monetary penalty of up to $10 million for a first offence, and a penalty of up to $15 million for each subsequent contravention of the Act. Although no private right of action exists for infractions related to the civil provisions of the Act, any person harmed by criminal conduct, including deceptive marketing practices, can recover damages from the offending party through either individual actions or class actions.

In addition to concerns with demand letters, the Bureau commented on assignments of patent rights in the updated IPEGs. In this regard, the Bureau examined the situation where a practicing entity assigns its patents to a PAE for the purpose of enforcement, and the two parties agree to split any revenues resulting from any enforcement. This practice is sometimes referred to as "privateering" in that the enforcement of one's patent rights is effectively outsourced. Based on the IPEGs, this activity is, in general, not anti-competitive, as "IP holders arranging their affairs so as to more effectively enforce their IP rights do not raise issues under the Act." This includes engaging the services of firms like PAEs that may specialize in patent enforcement.

Standard Essential Patents

As we reported previously, the draft IPEGs addressed issues related to Standards Development Organizations ("SDOs"), as agreements to fix prices for goods or services, or "naked agreements on licensing terms" may be of concern to the Bureau. The finalized IPEGs suggest that, provided there is no price fixing among IP owners or product makers, exercise of buyer power among potential licensees, foreclosure of innovative technologies or restriction of access to a standard, competition issues appear unlikely to arise.

With respect to "patent ambush", which is where a participant in an SDO fails to disclose patents relevant to a standard and then later asserts those patents, this practice may be found to be anti-competitive. Unless a "legitimate business justification" exists for the failure to disclose the patents during the standard setting process, the Bureau would view the patent holder's conduct as amounting to something more than the mere exercise of its patent rights. A finding in this regard could attract sanctions under the abuse of dominance provision in section 79 of the Act. These include injunctive relief, administrative monetary penalties of up to $10 million on a first offence and $15 million on subsequent offences, as well as other orders and prohibitions aimed at restoring competition.

With respect to reneging on a licensing commitment, such as, for example, demanding a higher royalty rate be paid by licensees than the patent holder agreed to during the standard setting process, the Bureau would likely review the patent holder's conduct under the abuse of dominant position provision of the Act. Absent a "legitimate business justification" on the part of the patent holder, such as a "credible efficiency or pro-competitive rationale for the conduct … which relates to and counterbalances the anti-competitive effects and/or subjective intent of the acts", the Bureau would view the patent holder's conduct as amounting to something more than the mere exercise of its patent rights. A finding in this regard could also attract sanctions under the abuse of dominance provision of the Act as discussed above.

Lastly, with respect to patent holders that seek injunctions after committing to license their patents on fair, reasonable and non-discriminatory ("FRAND") terms, such conduct may also attract scrutiny under the abuse of dominant position provision. Consistent with the draft IPEGs, the Bureau has indicated that seeking an injunction may be appropriate "when a prospective licensee refuses to pay a royalty that is determined to be FRAND by a court or arbitrator" or "when a prospective licensee refuses to engage in licensing negotiations". In addition, the finalized IPEGs also provide that an injunction may be appropriate "when a prospective licensee constructively refuses to negotiate (for example, by insisting on terms clearly outside the bounds of what could be considered to be FRAND terms)" or "when a prospective licensee has no ability to pay damages (for example, a firm that is in bankruptcy)." Therefore, "in certain circumstances it may be appropriate for a firm that has made a FRAND licensing commitment to seek an injunction against an infringing party."

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